Tax reversal boosts HNB 4Q; loan book stagnates

Absence of new loans, thin margins and weak assets quality hurt Hatton National Bank PLC’s (HNB) performance for the quarter ended December 31, 2019 (4Q19) as the country’s second largest private lender by assets was seen taking a cautious approach on new lending during the period beset by multiple challenges. 

HNB reported 11 percent decline in net interest income to Rs.13.5 billion during the quarter under review from a year ago as the interest expense rose faster than interest income as the bank felt margin pressure. 

“The sluggish economic conditions that prevailed resulted in a muted demand for credit, drop in margins due to the introduction of interest rate ceilings and the cautionary approach exercised by the bank towards growth resulted in subdued growth in Net Interest Income (NII),” HNB said in an earnings release. 

The net interest margin slipped to 4.5 percent from 4.64 percent at the start of the year while the bank suspended interest income from loans, which fell into non-performing status. 
Such loans surged to 5.91 percent by the year-end from 2.78 percent at the beginning of the year. 

HNB had no meaningful loan growth during the year as the loan book remained at Rs.771.9 billion, almost at the identical level to that of the beginning of the year. 

HNB was one of the few lenders, which had turned too conservative in new lending during 2019.

The bank’s fee and commission incomes also fell by 10 percent year-on-year (YoY) to Rs.16.1 billion. 

Meanwhile, the bank provided Rs.2.3 billion as possible bad loans for the three months to December 2019, down from Rs.4.4 billion in the year earlier period. However for the full year (FY19), the bank made Rs.11.4 billion as provisions against possible bad loans compared to Rs.9.8 billion in FY18. 

The bank said larger impairments were stemming from the stresses of its micro-lender. 

HNB reported operating profit before all taxes of Rs.7.9 billion, down 4 percent YoY.

The only respite the bank had during the year was its income tax, which reported a reversal of Rs.488.5 million compared to a tax charge of Rs.321.3 million a year ago.

This stemmed from the new circular issued by the Inland Revenue Department in February 2020 exempting the Sri Lanka Development Bonds from income tax liability with retroactive effect from April 2018. 

For the full year, the bank had close to Rs.2.0 billion tax windfall. 

As a result of the positive tax impact, the bank reported earnings of Rs.12.52 a share or Rs.6.3 billion for the 4Q19 compared to earnings of Rs.9.80 a share or Rs.4.9 billion in 4Q18.

For FY19, the bank reported earnings of Rs.29.32 a share or Rs.14.7 billion compared to earnings of Rs.35.25 a share or Rs.17.6 billion in FY18. 

The State-controlled private sector pension fund, Employees’ Provident Fund has 9.75 percent stake in HNB.